momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.It brings together, managers from the agricultural world and important people from external perspectives, such as health, development, strategy and defense. Its objective is to promote regulationof agricultural markets by creating new evaluation tools, such as economic models and indicators,and by drawing up proposals for an agricultural and international food policy.

‘Speculation greatly increases volatility’

Interview with Bertrand Munier, momagri Chief Economist

Since November 2008 there have been increased levels of speculation on agricultural futures markets. However useful moderate levels of speculation can be to hedge against market risks, excessive levels of speculation are a destabilising factor – and that is the risk now facing us, as momagri’s Chief Economist Bertrand Munier writes.

‘Speculation greatly increases volatility’

, by Bertrand Munier, Réussir Grandes Cultures, December 2009, n°231 Profitable speculation is often considered to be a stabilising factor. Short-term investors buy when prices are low and sell when they are high. But for this argument to hold it presupposes that speculators perfectly foresee the future equilibrium price. In finance-led markets, such as agricultural raw materials, this is not the case. Financiers base their predictions on producer behaviour, and are short-sighted in the way they incorporate other information. Indeed, when producers decide on their crop rotation, they can significantly miscalculate the price for which they will be able to sell their harvest. The system is complex and chaotic, with a certain degree of indigenous uncertainty, and is not directly correlated to merely natural phenomena. Under these conditions, speculation only serves to greatly increase price volatility, and does not play a stabilising role.

It is true that speculation is useful in providing liquidity in the futures market, a necessary factor for their proper functioning. The whole problem lies in the excessive level of speculation, with the sums at stake being several tens of times greater than the value of annual agricultural production. Attempting to ban speculation would be absurd. Quite apart from the real benefits it provides, we do not have the technical means to do so.

However, markets do need to be regulated, especially totally opaque OTC futures. That means making them less attractive to investors by reducing the hoped-for returns and increasing access costs. It would also be possible to forbid banks, which act as the essential intermediaries, from allowing a financial operation to go ahead unless it passed via an organised market. But the most fundamental issue at stake here is to improve the way agricultural production is organised, and to ensure that physical markets are regulated and stocks reconstituted. That way the risks of sparking off a crisis would be reduced.